Redundancy Costs Due to Staff Reduction Can Leave a Company Insolvent

Companies struggling to survive a severe economic downturn like the current one often consider ways to reduce their overheads.

Generally one of the biggest costs on a business is the payroll and looking to redundancies as a way to reduce them is a common response to a recession.

The reasons used for making employees redundant are generally economic, technical or organisational. This can be that new technology or a new system has made a job unnecessary, the company needs to cut costs or that the business is closing down or moving.

However, making staff redundant is closely regulated and there are rules for the steps that a business must follow if it chooses to go down this route. These can be extremely expensive and if not managed properly could actually leave the company insolvent rather than achieving the desired objective.

Firstly, many companies consult employment specialists to ensure that it complies with the rules and carries out the process correctly and this in itself can involve paying substantial fees.

If an employer is making fewer than 20 employees redundant in one establishment it must consult individually. 

For more than 20 employees being made redundant within a 90-day period it becomes a collective redundancy and the employer has a duty to consult with representatives of the potentially affected employees. If the employer does not consult then the employees can apply to an Employment Tribunal claim for a protective award. This is an award of up to 90 days’ pay.

Rules about employees’ redundancy entitlements are laid down by the Government. The calculation is based on how long the employee has been continuously employed, their age and their weeks of entitlement up to a certain limit (£380 per week current allowance).

Failure to carry out a redundancy operation can also result in employees taking the employer to a Tribunal with a claim of unfair dismissal. In certain circumstances this can also add to the employer’s costs, not only if the Tribunal rules in favour of the employee but also, in some specific circumstances Tribunals now have the power to award costs of up to £10,000. 

A better option for cost reduction before going down the redundancy route could be to call in a business rescue adviser to carry out a thorough review of the business to assess the business viability, look at its accounts and business model, identify any underlying weaknesses and suggest a restructuring plan.

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